
But then, it was not a bad deal aer all. I agree, I had sold a phone that I dint own. However I
could always buy the phone on Flipkart, and pass on the new unopened box to Rajesh. My only
fear in this transaction was, what if the price of the phone is above Rs.16,500?? In that case I’d
make a loss, and I’d regret entering into this transaction with Rajesh. For example if the phone
was priced at Rs.18,000 my loss would be Rs.1,500 (18,000 – 16,500).
However to my luck, the phone was priced at Rs.14,000/-, I promptly bought it on Flipkart, upon
delivery, I handed over the phone to Rajesh, and in the whole process I made a clean profit of
Rs.2,500/- (16500 – 14000)!
If you look at the sequence of transactions, first I sold the phone (that I dint own) to Rajesh, and
then I bought it later on Flipkart, and delivered the same to Rajesh. Simply put I had sold first,
and bought it later!
This type of transaction is called a ‘Short Trade’.
The concept of shorting is very counter intuitive simply because we are not used to ‘shorting’ in
our day to day activity, unless you have a trader mentality :)
Going back to stock markets, think about this very simple transaction – on day 1 you buy shares
of Wipro at Rs.405, two days later (day 3) the stock moves and you sell your shares at Rs.425. You
made a profit of Rs.20/- on this transaction.
In this transaction your first leg of the trade was to buy Wipro at Rs.405, and the second leg was
to sell Wipro at Rs.425, and you were bullish on the stock.
Going forward, on day 4, the stock is still trading at Rs.425, and you are now bearish on the stock.
You are convinced that the stock will trade lower at Rs.405 in few days time. Now, is there a way
you can profit out of your bearish expectation? Well, you could, and it can be done so by shorting
the stock.
You sell the stock at Rs.425, and 2 days later assuming the stock trades at Rs.405, you buy it back.
If you realize the first leg of the trade was to sell at Rs.425, and the second leg was to buy the
stock at Rs.405. This is always the case with shorting – you first sell at a price you perceive as high
with an intention of buying it back at a lower price at a later point in time.
You have actually executed the same trade as buying at Rs.405 and selling at Rs.425 but in re-
verse order.
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